A lien is a claim on property for payment of a debt. There are several different types of liens, some of which may be avoided in bankruptcy. Some, however, will keep their status as secured debts. Some liens are familiar to most consumers, such as mortgages, home equity loans and car loans. However, there are other types of liens that may be less familiar to the average consumer, which may create secured debt without the debtor even being aware of it.
Purchase Money Security Interests
These security interests are lien rights that the seller retains in the goods purchased when the seller finances the purchase. The lien can be created by a specific written agreement or may arise when the item is financed on the seller's revolving credit plan or store credit card. This kind of lien does not have to be perfected by the usual filing of a UCC financing statement.
In theory, if the buyer discharges his personal liability on the debt through bankruptcy, the seller retains the right to reclaim the goods. Typically, furniture and appliance stores use credit plans that give the seller a purchase money security interest in the goods purchased.
What about a credit card?
A credit card is an unsecured debt. If you buy the same goods using a Visa or MasterCard (credit provided by a lender other than the seller), you get clear title to the goods and the credit card company doesn’t have a lien. Even if you discharge your liability on the credit card, the goods charged to the card are yours, free and clear.
It is our experience that creditors with purchase money security interests in small household consumer goods almost never file suit to enforce their interest in the goods. They are not really interested in the goods. They rely on the debtor's fear of repossession to "encourage" debtors to pay for things with little present market value.
Usually a judgment does not, in and of itself, give the judgment creditor a lien. The creditor must usually take an additional step of filing or recording the judgment with the CountyClerk to create a lien on the judgment debtor's real property.
In Texas, recording an abstract of judgment with the CountyClerk gives the judgment creditor a lien on all of the debtor's real estate in the county. But, a judgment lien never attaches to a valid Texas homestead.
In analyzing a debtor's situation for bankruptcy planning, it is important to know if judgment liens have been perfected, since secured debts are totaled separately from unsecured debts in calculating the debtor's eligibility for Chapter 13. Judgment liens may be avoided if they impair exemptions; in Chapter 13 they can be stripped down to the value of the assets to which the lien attaches.
The recordation of a federal and state tax lien perfects a lien on all of the taxpayer's property, real and personal. It is a statutory lien, so cannot be avoided as a lien impairing an exemption under § 522(f), but can be stripped off in Chapter 13 if there is no equity in the property for the lien to attach. In some cases, it may attach even to retirement savings and 401(k) plans that are beyond the reach of other creditors.
Sales of Property Subject to a Lien
It is illegal to sell property that is mortgaged at a bank or is subject to a valid lien. Since the lender has rights in the items themselves and in any proceeds from their sale, the borrower is not free to sell the asset and pocket the proceeds or even spend the proceeds or pay other business debts. Spending the sales proceeds without the lender's permission may be fraud, which is not dischargeable under 11 U.S. C. 523, and may also be a crime. You could jeopardize your case by doing so. Don’t ever sell the bank’s collateral without their consent or payment of the bank’s debt in full, immediately upon the sale.
Dana A. Ehrlich
Dana A. Ehrlich is a bankruptcy specialist who lives and works in San Angelo, Texas. He has lived in the ConchoValley and San Angelo, TomGreenCounty for many years. His practice is primarily consumer bankruptcy law and he is a board certified bankruptcy specialist for Chapter 7 and Chapter 13. He may be reached at 325-655-5351 or at firstname.lastname@example.org.